Horizons ETFs unfazed by Canadian HFT research figures

By: Jonathan Boyd | 28 Jun 2012

Figures suggesting that up to 42% of all stock trades in Canada could be driven by automated high frequency trading (HFT) should not cause undue concern among ETF investors, according to the man in charge of explaining Canadian ETF provider Horizons product and business objectives to investors in Europe.

Jaime Purvis, executive vice-president National Accounts at Horizons has been meeting European investors over the past week as part of the process of introducing what is the most recent addition to Mirae Asset’s global ETF platform.

Along with Horizons’ 87 ETFs, this also includes the South Korea and Hong Kong based Tiger ETF range offered by Mirae Asset Global Investments, as well as the Australia based BetaShares ETFs, taking platform AUM to about $5bn.

The HFT story has come to light following research conducted by the Industry Regulatory Organization of Canada (IIROC). It looked at a quarterly period in 2011 to identify buying and selling patterns linked to HFT. The 42% figure was revealed during a conference in Toronto and reported by local newspaper the Globe and Mail this week, which added that it represented the first stage in a longer term study to identify precisely how prevalent HFT is in Canada. It has been suggested that while the HFT figure overall is high, it could be dominating trade in certain types of securities – including ETFs. That would be a sensitive issue in Canada, where retail investing in exchange traded products is widespread.

Purvis told InvestmentEurope that despite the research findings so far, it is important for investors to recognise that any effects would not apply equally to all parts of the market.

“Really, HFTs are only a problem if they are providing a false sense of liquidity as being the primary volume maker in a certain security, so that if they pull their bids out the liquidity dries up. This is what happened to a number of stocks in the flash crash of May 6, 2010,” he said.

“HFT trading is largely specific to stocks, and increasingly in ETFs with high daily trading volumes. It is important to note that there is a designated broker (DB), or lead market maker, for all ETFs. An essential element of the DB’s role is to protect the NAV of the ETF by offering a fair bid and ask containing the NAV as it changes value throughout the course of the trading day.”

“Further, we believe that HFTs have virtually no impact on active ETFs, as AETFs are selective in what stocks they would purchase, and the portfolios can turn over with greater frequency than passive index ETFs. If an HFT’s activity is messing around with stock valuations, one would make the assumptions that a good portfolio manager would recognize that and would stay out of the trades. That said, if the activities of HFTs were to effect the valuations of a certain stock, that stock’s effected valuation would be reflected in an index ETF that is required to own the stock.”